Chinese government policies are expected to support a medium-term thermal coal prices of US$73 per tonne, according to a new report from Wood Mackenzie (WoodMac).
According to the research company, China’s domestic benchmark thermal coal prices is sustainable at RMB515 per tonne in the medium term – a price that represents the balance in break-even prices between coal mines and coal-fired power plants in the main regions of China.
This domestic prices equates to a Newcastle thermal coal prices of US$73 per tonne FOB, WoodMac said, a 46% improvement on the sub-US$50 per tonne levels of earlier this year and at which 98% of the seaborne market is cash positive.
“The size of China’s domestic coal market compared to the seaborne market means that its role as a major driver of price formation will continue,” said Rory Simington, Principal Analyst, Mining & Metals Fundamentals Research at WoodMac, said.
“Over the last year, we have witnessed several rounds of Chinese government interventions in the coal sector, which resulted in priced almost doubling to RMB616 per tonne in October, compared to RBM 365 per tonne in January.”
Although the Chinese government has now relaxed some measures aimed at boosting coal prices, WoodMac expects the Chinese government to support a price well above 2016 lows as it balances maintaining positive cash flows for a majority of coal producers with margins of the utility sector.
WoodMac also said that supply rationalisation – another key plank of Chinese government polity – could be continued at higher price levels. At RMB515 per tonne, 700 million t of Chinese thermal coal production is still cash negative.
"We expect the Chinese government policy to support higher price levels over the medium term and provide a much more positive outlook for a sector that has been under much pressure of late. However, there is also a significant likelihood of continued price volatility in the seaborne market as the Chinese government adjusts its policy to achieve desired domestic outcomes," aoncluded Simington.
Read the article online at: https://www.worldcoal.com/coal/17112016/chinese-policies-to-support-higher-coal-prices/